Mettler-Toledo International Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited results are reported under U.S. GAAP. The company supplies precision instruments and related services, including laboratory, industrial, product-inspection, process-analytics and food-retailing solutions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $570.3 million | $561.1 million | $1,105.7 million | $1,059.9 million |
| Gross profit | $299.0 million | $296.2 million | $576.1 million | $557.7 million |
| Gross margin | 52.4% | 52.8% | 52.1% | 52.6% |
| Earnings before taxes | $81.7 million | $81.3 million | $151.0 million | $144.6 million |
| Net earnings | $61.7 million | $60.2 million | $114.0 million | $107.0 million |
| Diluted EPS | $1.93 | $1.82 | $3.54 | $3.23 |
Q2 sales rose 2% in U.S. dollars and 6% in local currencies; six-month sales rose 4% and 7%, respectively. Acquisitions contributed approximately 1% and 2% to growth for the quarter and half-year. Net earnings increased about 3% in Q2 and 7% in the first half. Gross margin declined year over year in both periods.
For the first six months, product sales increased 5% in U.S. dollars and service revenue increased 1%. Q2 product sales rose 2%, while service revenue declined 1% in U.S. dollars. The reported tax provision implies an effective rate near 24.5%, consistent with management’s projected annual rate.
Cash flow, balance sheet and capital allocation
- Six-month operating cash flow was $112.0 million, versus $93.6 million a year earlier. Capital expenditures were $43.2 million, compared with $40.5 million; approximately $22.4 million related to the Blue Ocean IT program.
- Cash and cash equivalents were $134.8 million at June 30, down from $235.6 million at year-end 2011. Investing activities used $44.6 million and financing activities used $168.5 million; the latter included $135.8 million of share repurchases.
- Total debt was $458.8 million, including $27.1 million current and $431.7 million long-term. The company reported $544.3 million of availability under its credit facility. Cash and debt balances are as of June 30, 2012.
- Current assets were $861.0 million and current liabilities $523.0 million. The company said operating cash flow and available credit and local facilities should fund anticipated working-capital needs and capital spending for the foreseeable future.
- The company repurchased 797,095 shares for $135.8 million during the first half, at an average $170.31 per share. $580.3 million remained under its $2.25 billion repurchase program.
Material changes and operating trends
- Sales growth was strongest in Asia/Rest of World: first-half sales by destination grew 16% in local currencies; Europe was flat and the Americas grew 6%. In Q2, local-currency growth was 14% in Asia/Rest of World and 6% in the Americas, while Europe declined 2%.
- First-half external-customer sales increased 17% in U.S. dollars in Chinese Operations and 6% in U.S. Operations, but declined 6% in Swiss Operations and 3% in Western European Operations. Segment profit rose overall to $181.9 million from $168.3 million.
- Food-retailing sales declined 6% in local currencies in Q2 and 3% in the first half, reflecting reduced project activity and economic conditions. Laboratory-related sales grew 8% in local currencies in both periods.
- Gross margin pressure reflected unfavorable business and geographic mix, higher production costs and acquisitions, partly offset by volume, pricing and currency benefits. SG&A as a share of sales improved, while product gross margin fell and service gross margin improved.
- Comprehensive income for the first half was $110.1 million versus $163.1 million. Other comprehensive income was a loss of $3.9 million, compared with income of $56.1 million, with currency translation moving to an $8.1 million loss from a $54.6 million gain.
Outlook, risks and unusual items
- Management said the global economic environment had deteriorated, especially in Europe. It expected 2012 local-currency organic sales growth to remain below 2011 and 2010 growth, with second-half growth lower than first-half growth. It also expected second-half sales growth in laboratory and industrial products, particularly in Europe, to be lower; Swiss and Western European external sales were expected to be adversely affected.
- Management cautioned that further global economic deterioration could adversely affect sales and that the potential impact was difficult to predict. No quantified full-year sales or EPS guidance is provided in the supplied filing text.
- A 2012 cost-reduction program, primarily severance, is expected to incur $20–$25 million of charges and be substantially completed by the end of 2013. $8.1 million was recorded in the first half, including $7.8 million in Q2.
- Currency exposure is significant. Management estimated that a 1% Swiss franc strengthening against the euro could reduce annual pretax earnings by $0.9–$1.2 million; a 1% strengthening against the U.S. dollar could reduce annual pretax earnings by $0.7–$0.9 million. A 10% weakening of the U.S. dollar against currencies in which debt is denominated would increase reported debt by about $3.6 million.
- The company uses interest-rate and foreign-exchange derivatives, not for trading. A July 2012 euro forward contract with a $72.3 million notional amount was entered into after quarter-end. Legal proceedings, including environmental matters, were described as ordinary-course matters; management did not expect them to have a material adverse effect. Part II reports no legal proceedings, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether weakening economic conditions, particularly in Europe, caused second-half sales growth to fall as management anticipated.
- Whether margin pressure from product mix, production costs and acquisitions persisted, and how restructuring costs affected reported earnings.
- Cash generation and liquidity after continued share repurchases, capital expenditures and any acquisitions; verify debt balances and credit-facility availability.
- Actual sensitivity of earnings and reported debt to currency movements, especially Swiss franc and euro exchange rates.
- Whether food-retailing demand, European industrial activity and the Chinese segment’s profitability improved or deteriorated after Q2.